BILL ANALYSIS
SENATE COMMITTEE ON INSURANCE
Senator Herschel Rosenthal, Chair
Assembly Bill 3234 (Knowles) Hearing Date: July 3,
1996
As Amended:June 10, 1996
Fiscal: No
SUMMARY
AB 3234 would adopt in statute the National Association of
Insurance Commissionerso Model Regulation on Life Insurance
Illustrations, would repeal existing oYield Cost Indexo and
oConsumer Guide to Buying Life Insuranceo regulations and
replace them with a oSurrender Cost Indexo statute.
DIGEST
Existing law
1. Specifies certain acts committed by an insurer which
would constitute unfair competition or unfair and
deceptive practices.
2. Includes in the category described in #1 the use or
issuance of illustrations or advertising of life
insurance products which contain false or misleading
statements, or other misrepresentations associated with
the value of the policy.
3. By regulation, has implemented #2 by requiring life
insurers to comply with a oyield cost indexo
calculation, which provides specified disclosures to
prospective purchasers of life insurance products. A
oConsumer Guideo is part of this regulation.
This bill
1. Adopts a National Association of Insurance
Commissioners (NAIC) Model Regulation on life insurance
illustrations. The Model Regulation involves a
comprehensive regulatory scheme to control when and in
what manner life insurers may use oillustrationso to
AB 3234, Page
2
describe the operation and benefits of life insurance
policies. Key features of the Model Regulation
include:
- a requirement that life insurers notify the
Commissioner if a particular product will be sold via
use of illustrations, and prohibits use of any
illustration absent such notification;
- restrictions on the methodology an insurer can use to
generate the values which are used to oillustrateo how
the policy will perform over time;
- requirements that non-guaranteed values be clearly
identified, and accompanied by a statement that the
illustration includes assumptions which are unlikely to
continue unchanged over time, and that actual
performance may be more or less favorable than the
values illustrated;
- a prohibition against use of statements to the effect
that there is a ovanishing premiumo aspect to the
policy;
- disclosure statements signed by both applicant and
agent indicating that non-guaranteed values have been
explained, and that no statements inconsistent with the
values illustrated were made;
- a requirement that policyholders who have received an
illustration be annually provided with information
showing how the policy is performing, and informing
them that they may request a free illustration which
will contain updated information on the projected
performance of the policy.
2. Requires life insurers to appoint an actuary to certify
that any illustrations used comply with the law. The
Commissioner would be empowered to object to an actuary
if, after hearing, specified criteria are established.
3. Provides that violations of the bill may be enforced
pursuant to specified provisions of the Unfair
Practices Act which require a hearing before issuance
of a stop order, and further requires resort to the
courts through the Attorney General if the conduct does
AB 3234, Page
3
not stop.
4. Adopts a oSurrender Cost Indexo which is a method
designed to measure the time value of money as compared
to other products. The methodology for generating the
index number is set forth in the bill, but the bill
also authorizes use of other methods to generate an
index number if used in addition to the mandated
method.
5. Repeals the existing regulations adopted by the
Department of Insurance in 1994 which require use of a
oYield Cost Indexo and provide for a oConsumer Guideo
to the purchase of life insurance.
COMMENTS
1. Purpose of the bill. The author introduced AB 3234 at
the request of the California Association of Life
Underwriters (CALU) and the Association of California
Life and Health Insurance Companies (ACLHIC). The
sponsors believe that reform of life insurance
disclosure laws is needed in order to address many of
the problems which have existed over the past few
years. Several large life insurers have faced
nationwide scrutiny and enforcement fines due to
marketing problems. Many of these abuses would be
addressed by the reforms proposed by the bill. The
bill is designed to address two issues: misleading
oillustrations,o which can be a particularly difficult
issue in an era of declining interest rates; and
comparison indices. The bill addresses these two
problems by adopting a new NAIC Model Regulation to
control misleading use of policy illustrations, and by
replacing a fairly recent DOI regulation with an
alternative which has been in use for a number of
years, and is in place in one form or another in 49
states.
2. Support. Pacific Mutual Life Insurance Company
supports the bill because it furthers the interest in
uniformity of laws, which generate cost savings for
insurers, and therefore policyholders.
3. Opposition. Consumers Union (CU) and the Consumer
Federation of America (CFA) oppose the bill. CU notes
that Section 1 of the bill -- the NAIC oillustrationso
AB 3234, Page
4
model -- contains some consumer benefits; however, othe
repeal of the Yield Index in Section 3 takes away an
important information tool that is an aid to comparison
shopping for consumers.o CU urges several improvements
to the oillustrationso portion of the bill -- issues
which were addressed by earlier versions of the Model
Regulation prior to its final adoption by the NAIC.
Business columnist Jane Bryant Quinn has stated:
oWhatos missing from the NAIC proposal? The big items
are: disclosure of the net rate of return on your
policy cash values, and disclosure of the policyos
internal costs. With those, you could compare one
policy with another -- which the industry definitely
doesnot want.o
CFA makes no mention of the oillustrationso portion of
the bill, but states that the repeal of the Yield Index
(YI) regulation ois bad legislation for consumers in
California.o In response to the replacement of the
Yield Index by the Surrender Cost Index (SCI -- as
proposed by Section 2 of the bill), CFA states that
othe SCI is useless, and frequently produces misleading
results.o CFA further notes that the National
Association of Life Underwriters has testified in the
past that SCI is no longer useful for todayos life
insurance products. The opponents argue that the index
issues are exceedingly technical, and should be left
for the Commissioner to address by regulation -- which
the Commissioner is fully empowered by existing law to
do.
4. History of abuses. Both proponents and opponents
generally agree that there were abuses in the way that
life insurance has been marketed in the past. Each
notes cases in which very large and well known life
insurers have faced disciplinary actions as a result of
these abuses. Both proponents and opponents
participated in efforts at NAIC, and in the United
States Senate, to address these problems. The
differences revolve around what precisely should be
done. Generally, opponents accept that the worst of
the abuses can be addressed by the Life Insurance
Illustrations Model Regulation, but believe that the
Model was unnecessarily watered down prior to adoption
by the NAIC, and that this bill leans even further in
the industryos favor. They also note that annuities
AB 3234, Page
5
were specifically excluded from the Model, and will be
separately addressed with amendments to the Model.
Proponents would like to place the NAIC model
oregulationo into ostatuteo in order to limit the
Commissioneros discretion in this area. Similarly,
Sections 2 and 3 are designed to obviate the need for
the Commissioner to take administrative action.
5. Yield Cost Index. The YCI is based on an NAIC Model,
and the regulation was adopted in California in 1994.
It was modified last year at the industryos request to
address some technical concerns with the calculations.
Basically, the YCI is designed to factor out the life
insurance portion of life insurance policies which have
investment features, and then provide an index number
which enables consumers to compare the value of the
policy with other products. Proponents of the YCI note
that some criticisms of its results -- such as
different results for smokers and nonsmokers, or for
males and females -- is irrelevant because it is not
designed to compare a policy for two different people,
but rather to compare different options for the same
person (and in any case are attributes of the SCI as
well).
Proponents suggest that one reason life insurers
dislike YCI is that it suggests that certain life
insurance products may not be the best buy for some
consumers in some circumstances. For instance, YCI
tends to highlight the fact that whole life products do
not make as much sense for a person with a short-term
need as for a person viewing the investment on a
20-year horizon.
Opponents of YCI argue that it is a oCalifornia-onlyo
rule that increases costs to insurers, and is not more
helpful to consumers than SCI. SCI, on the other hand,
has been around a long time, and is in place across the
country.
6. Consumer Guide. Section 3 of the bill would repeal
regulations which address what have been a
non-controversial aspect of the broader life insurance
disclosure debate -- the NAIC Consumer Guide to
purchasing life insurance. Why should this regulation
be repealed by legislation?
AB 3234, Page
6
7. Need for Legislative Action vs Rulemaking. The YCI is
currently a regulation, adopted by the DOI and part of
the California Code of Regulations. SCI, which the
bill proposes to adopt in lieu of the YCI regulation,
is in force in other states primarily via adoption of
regulations years ago. CFA recommends that, since the
subject of these indices is a technical, recommended
NAIC oregulation,o it is
best left to the administrative rulemaking process, so
that actuarial arguments can be addressed by DOI
actuaries and others able to present technical input to
the Commissioner. Why should the Legislature repeal
complex and technical regulations which the Insurance
Commissioner is empowered to modify or repeal, and
replace them by statute with other rules that the
Insurance Commissioner is also empowered to adopt by
regulation?
PRIOR ACTIONS
Assembly Insurance Pass 14-0
Assembly Appropriations Pass 16-0
Assembly Floor Pass 73-0
POSITIONS
Support
Association of California Life Insurance Companies
California Association of Life Underwriters
Pacific Mutual Life Insurance Company
Oppose
Consumer Federation of America
Consumers Union
Consultant: Mark Rakich